Ankur Vyas - IR Bill Rogers - Chairman and CEO Allison Dukes - CFO

John McDonald - Bernstein Matt O'Connor - Deutsche Bank Betsy Graseck - Morgan Stanley Amanda Larsen - Jefferies Geoffrey Elliott - Autonomous Research Mike Mayo - Wells Fargo Securities Erika Najarian - Bank of America Gerard Cassidy - RBC Steve Moss - B. Riley FBR Marty Mosby - Vining Sparks Saul Martinez - UBS

Ladies and gentlemen, thank you for standing by. Welcome to the SunTrust Third Quarter Earnings Call. As a reminder, today's conference is being recorded. I would now like to turn the conference over to your host, Ankur Vyas. Please go ahead, sir.

Thank you. Good morning, everyone, and welcome to SunTrust Third Quarter 2018 Earnings Conference Call. Thank you for joining us. In addition to today's press release, we've also provided a presentation that covers the topics we plan to address during our call. The press release, presentation and detailed financial schedules can be accessed at investors.suntrust.com. With me today, among other members of our executive management team, are Bill Rogers, our Chairman and Chief Executive Officer; and Allison Dukes, our Chief Financial Officer. Before we get started, I need to remind you that our comments today may include forward-looking statements. These statements are subject to risks and uncertainty, and actual results could differ materially. We list the factors that might cause actual results to differ materially in our SEC filings, which are available on our website. During the call, we will discuss non-GAAP financial measures when talking about the company's performance. You can find the reconciliation of these measures to GAAP financial measures in our press release and on our website, investors.suntrust.com. Finally, SunTrust is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized live and archived webcasts are located on our website. With that, let me now turn the call over to Bill.

Thanks, Ankur. Good morning, everyone. I'll begin with an overview of the third quarter, which we highlight on slide 3. Earnings per share for the quarter was $1.56, which represents a 47% year-over-year increase. Our strong credit quality, improved efficiency and solid loan growth were key drivers of the year-over-year improvement with continued benefit from a favorable operating environment, given both lower tax rates, including certain discrete benefits in the third quarter and higher interest rates. The culture of continuous improvement we've instilled across the company is reflected within the results. Our increased discipline on both expenses and returns continues to drive improvements in our profitability. I'll highlight some overall revenue trends. On the lending side, we had good growth in the third quarter with average loan balances up 1.8 billion or 1%, driven by growth across most categories. This is a reflection of the momentum we have with both wholesale and consumer clients, in addition to new lending capabilities we've added over the past few quarters. These levels of loan growth have outpaced our deposit growth, which in turn has driven increased usage of wholesale funding. While this is a positive for net interest income, our net interest margin declined 1 basis point this quarter, as we previewed a month ago. On the fee side, capital markets related income declined sequentially, largely due to the timing of certain deals, which were pushed in to the fourth quarter. That said, our performance in equity and M&A were strong as well as our progress on delivering capital market solutions to non-CIB clients, all of which continue to reflect our increased strategic relevance to clients. Our quarter ended strong and investment banking pipelines look very healthy, but I'm much more focused on our long term growth versus any one quarter. So overall, our revenue trends were somewhat mixed in the third quarter, I feel positive about the momentum we have going into the next quarter. More importantly, I feel even better about how we continue to work together as one team to deliver our full capabilities to our clients. This is simply how we win at SunTrust. Separately, credit quality continues to be a strength for us, not only because of the favorable operating environment, but also because of our disciplined risk culture. Our consistently lower charge-off ratio and improved outlook for credit losses across the portfolio drove a 4 basis point decline in our ALLL ratio. Our efficiency ratio remained stable, compared to the second quarter, despite the decline in fee income, due in part to our ongoing focus on disciplined expense management and also due to certain benefits realized in the third quarter. Again, our long term performance is much more important than our quarterly results and we remain highly focused on creating capacity to support our onboard investments and revenue growth and technology to better serve our clients, while also improving our efficiency. We have delivered consistently on these strategic imperatives. Lastly, we commenced our 2018 capital plan in the third quarter, executing 25% of our authorized $2 billion share repurchase program, helping reduce our share count by 4% compared to the prior year. Overall, our earnings performance year to date has been strong and bigger picture, I'm confident that 2018 will be the seventh consecutive year of higher earnings per share, improved efficiency and increased capital returns. This consistent track record continues to validate our improved execution, the strength and diversity of our franchise and our increased relevance with clients, which is in large part due to our ongoing investments in talent and technology. Now, let me turn it over to Allison to cover some more details.

Thank you, Bill and good morning, everyone. Moving to slide 4, our net interest margin declined by one basis point this quarter, consistent with the updated guidance we provided recently. Our loan growth has outpaced deposit growth, which has driven a need for higher levels of wholesale funding. We also saw continued mix shift within our deposit towards higher cost deposits, including our targeted focus on CDs and certain corporate deposits. More importantly, these increased funding costs were driven by the strong loan growth we delivered, resulting in a solid $24 million sequential increase in net interest income. Looking to the fourth quarter, we expect our net interest margin to increase by 0 to 2 basis points relative to the third quarter, largely as a result of the September rate hike. Moving to slide 5, non-interest income decreased by 47 million sequentially, driven primarily by lower capital markets revenues, which as Bill mentioned were impacted by the timing of certain transactions that were pushed into the fourth quarter. There were also a few discrete items, which negatively impacted fee income trends. Specifically, the second quarter included $12 million of gains related to a fintech equity investment and the third quarter included a $7 million charge in card fees, related to a change in our processing for recognizing rewards expenses, which was effectively a result of four months of reward expenses being recorded in the third quarter. Looking into the fourth quarter, non-interest income should build off the third quarter level. Capital markets pipelines are strong in certain fee income categories, including mortgage servicing and CRE related income are seasonally higher in the fourth quarter. As you can see on slide 6, the solid expense discipline we've been delivering continued into the third quarter. Expenses were stable sequentially and year-over-year, as increases in outside processing and software for both periods were offset by declines across most expense categories, given our ongoing efficiency initiatives, revenue trends and certain benefits earned in the current quarter. On the latter point, one of the larger benefits within net occupancy expense where we had a large tenant from one of our owned office buildings terminate their lease early, which drove some benefits in the second quarter and a larger benefit in the third quarter. Outside processing and software expense increased sequentially and year-over-year. The primary driver is increased software amortization expense for new and upgraded technology assets. The most notable investments include a new default management platform, which automates key aspects of our workout program and replaces legacy systems and our data lake, which is foundational to our ability to leverage data to improve the client experience and enhance revenue streams. We also had $67 million or $0.14 per share of discrete tax benefit this quarter, related to the finalization of tax reform and the merger of SunTrust Mortgage into SunTrust Bank, the latter of which I will cover on the consumer slide. On a separate note, I want to make you aware of the charge we will recognize in the fourth quarter. In connection with our continued effort to de-risk the balance sheet, we are terminating a pension plan that we acquired as a part of the National Commerce Financial acquisition in 2004. The terminations will result in an approximately $60 million to $65 million one-time pretax charge related to unrealized losses, previously recorded in AOCI. This is in accordance with accounting requirements, for which differences between expected and actual performance are recorded in AOCI and then subsequently recognized in a P&L over time or upon termination or settlement of the pension plan. As you can see on slide 7, the tangible efficiency ratio was 58.9% for the quarter and 59.9% year-to-date. Given the progress we've made, we're on track to achieve our sub 60% target. Equally important, we remain focused on continuing to create capacity to invest in technology and talent, given the compelling opportunities we have to invest in growth, which we believe will create the most long term value for our clients and for our shareholders. Our performance in 2018 validates our ability to do this. Specifically, outside processing and software costs, which is where a portion of our technology spend resides are up 9% and yet our efficiency ratio still has improved by 150 basis points. Our proven, consistent track record should give you the confidence that we will continue to deliver efficiency improvement, but the exact pace of our improvement will be dependent upon the investment opportunities we pursue and the economic environment in any given quarter or any given year. Moving now to slide 8. Our net charge off ratio increased from 20 basis points to 24 basis points sequentially. The low level of net charge-offs reflects the relative strength we're seeing across our C&I, CRE and residential portfolios, performance we are strongly pleased with that we remain cognizant that there could be some variability going forward. The ALLL ratio declined by 4 basis points sequentially, as a result of the continued asset quality improvement. Provision expense increased by $29 million from a very low level in the second quarter, as a result of a lower ALLL decline and slightly higher net charge-offs. Given the trends we're seeing in our portfolio, we would expect to operate within a 25 to 30 basis point range of net charge-offs, as we look into the fourth quarter. We do expect ALLL ratio to generally stabilize from here, which would result in a provision expense that modestly exceeds net charge-off, given loan growth. Now moving to the balance sheet on slide 9. Improved lending trends we saw in the second quarter continued this quarter with average loans up 1% and period end loans up 2% sequentially. The growth was broad based across C&I, CRE, consumer lending and mortgage. Looking ahead, we have strong momentum across both commercial and consumer lending and our pipelines support this. On the deposit side, average balances were stable sequentially and year-over-year. As anticipated, we continue to see a migration from lower cost deposits to CDs, largely due to our targeted strategy, which allows us to retain our existing depositors and capture new market share, also managing our asset sensitivity profile. We still believe this is an effective strategy and would expect the migration from lower cost deposits in to CDs to continue as interest rates rise. Separately, within our wholesale business, we increase rates on our corporate liquidity product, given this is a more attractive source of funding than wholesale debt and we saw solid growth in response. Interest bearing deposit costs increased 11 basis points sequentially, slightly higher than the prior quarter increase of 10 basis points, given the continued increases in benchmark rates, the migration towards higher cost deposits and the pickup in lending activity. We expect deposit betas to continue to trend upwards, but the trajectory will be influenced by the absolute level of rates, in addition to the levels of loan growth we are delivering. We remain focused on maximizing the value proposition for our clients, outside of rate paid and thus improving our deposit growth trajectory in a responsible fashion. However, if deposit growth is lower, our access alternative funding is strong. Moving to slide 10, which provides an update on our capital position. Our estimated Basel 3 common equity tier 1 ratio was 9.6% and the tier 1 ratio was 10.7%, both were down slightly relative to the prior quarter, due to growth in risk weighted assets and the commencement of our 2018 capital plan, which provides for a 52% increase in share repurchases and a 25% increase in the dividend. We're beginning to make progress towards our medium term capital ratio objectives. Our capital plan commission does give us the flexibility to accelerate our share repurchase cadence, which is the strategy we are considering for the fourth quarter, given our views on current valuation, relative to our future potential. Now moving to the segment overview, I'll begin with the consumer segment on slide 11, where we continue to have solid momentum. Our positive lending trends continued in the third quarter, in large part due to the investments we've made in LightStream, our point of sale lending partnership and credit card, all of which collectively improve our growth, returns and diversity. Our momentum in LightStream continues, given the work we've done this year to enhance our analytic, new product offerings and growth and partnerships and referrals. Some of this collective growth has been offset by the continued declines in home equity and slower growth from certain lower return portfolios, like auto. While we're seeing strong growth in net interest income within consumer, mortgage related income has been pressured, particularly when looking at year-over-year trends. Relatedly, we completed the merger of SunTrust Mortgage in to SunTrust Bank in the third quarter. This merger will simplify our organizational structure and allows for efficiencies, but more importantly, it will allow us to more fully serve the needs of our consumer clients, irrespective of whether they begin their SunTrust relationship with a mortgage or another lending or deposit product. In the third quarter, we recognized roughly $21 million of the tax benefits from this merger. There are also approximately $13 million of related conversion costs, most of which will be reported in the fourth quarter. Partially offsetting the mortgage declines is Wealth Management, which is demonstrating positive underlying trends. AUM is up 3% sequentially and 7% year-over-year, a reflection that our value proposition of our targeted client segments is resonating in the marketplace, driving growth in new clients and greater wallet share with existing clients. Wealth management related non-interest income is up a solid 4% year-over-year. In addition to the solid revenue growth in consumer, the actions we have taken to improve efficiency are driving improvements and overall profitability. When excluding a $55 million legal accrual reversal in the third quarter of 2017, our tangible efficiency ratio has improved by 230 basis points year to date in the consumer segment. Relatedly, our branch count is down by 5% in the past year, which is largely enabled by our increasing digital adoption rate and as a part of our broader strategy to leverage technology, to enhance our efficiency. Our increased digital adoption rates are also reflected in the national recognition we are receiving for these digital capabilities. Javelin recently awarded SunTrust for leader awards for online and mobile banking capability. SunTrust was one of only four banks to receive a Leader award in four or more distinct category. Separately, our mortgage servicing business was named top five by JD Power and our auto finance business was named top three overall by auto finance performance. The latter two awards are a testament to the outstanding service our teammates are providing our clients. Bigger picture, we're just over a year into our journey of creating a more integrated consumer business and we're very pleased with the initial results. We've made good strides in appropriately wiring the ecosystem, so we're anticipating and delivering the right solution and advice at the right time. This not only enhances the client experience, it also generates operational efficiencies. We still have more work to do, but we have a great team in place, we have a clear strategy and we are in some of the highest growth markets in the country. Moving to wholesale banking, on slide 12, where our consistent strategy continues to drive good results. On the lending side, we saw solid growth across CIB, commercial and CRE. More broadly, the growth in our wholesale lending portfolio is a reflection of our clients increased optimism on the economy, which has resulted in higher utilization rates and increased M&A activity. This growth also reflects the investments we have made to meet a broader set of client needs, especially within CRE and aging services, in addition to our geographic expansion of commercial banking. Within capital markets, we had another good quarter, but revenue was down compared to the prior quarter and prior year, both of which were especially strong quarters. The primary driver of the decline was the timing of certain transactions, which were pushed into the fourth quarter. More broadly, we are also seeing continued pressures on capital markets fees and structures, given the impact non-bank lenders are having on the space. Maintaining underwriting discipline is a key tenant of our strategy and we will therefore continue to pass on transactions, where the structures do not comply with our standards. That said, the underlying strategic momentum within capital markets is strong. Specifically, M&A and equity related income is up 7% year-to-date, which is helping to offset some of the aforementioned declines in debt capital markets. Both M&A and equity have been key areas of strategic investment for us and we are encouraged by the continued momentum we are having in meeting more of the strategic needs of our clients. And year-to-date, capital markets fees from commercial banking, CRE and CWM clients are up 37%. We're still in the early stages of executing the strategy, but we are highly encouraged by the momentum and we believe we are uniquely positioned to succeed in this space, given our full set of capabilities and one team approach. The partnership between our commercial bankers, investment bankers, product and industry specialists and corporate finance teams is a great reflection of our culture. And finally, we're benefiting from continued low charge-off levels, which are a reflection of the overall strength of the economy in addition to our consistent discipline around credit, structure and diversity. Big picture, more market conditions can and do create quarterly variability, pipelines are healthy and we remain optimistic about the growth opportunities we have in wholesale, as we bring our differentiated business model to new and existing clients. Now, I'll turn the call back over to Bill.

Thanks, Allison. To conclude, I'll point to slide 13, which highlights how our performance this quarter aligns with our investment thesis. Overall, this was a good quarter, in one where our performance is the direct result of strategies we've put in place and investments that we've made. There were some puts and takes on the revenue side, largely tied to market conditions, but the diversity of our business mix and loan portfolio enable us to maintain relatively stable revenue trends. Importantly, my near to medium term optimism about our client business remains high. I've spent a lot of time with our teams in annual wholesale client planning process recently, and I've never been more encouraged with our go to market strategy, one team approach and most importantly, our talent. While the competitive environment is intense and in some cases irrational, when we lead with purpose, advice, expertise and our one team approach, we have an opportunity to win without simply using price or structure. Across the entire company, we remain highly focused on making the right investments today, which position us to meet more client needs and drive incremental growth in the future. Allison highlighted a number of digital awards our consumer team received this quarter, which reflect years of investment and focus on improving our digital client facing capabilities. Between our mobile and online capabilities for consumer clients, [indiscernible] digital mortgage application, I feel very good about our collective set of digital capabilities for consumers and the progress we've made in enhancing these platforms over the last few years and we'll continue to make the requisite amount of technology investments to meet evolving client needs and to strengthen our underlying foundation and technology infrastructure. That said, improvements in efficiency and investments in technology can coexist, as they've already done in 2018 and in previous years. Pace, cadence and execution are also important, simply investing more will not guarantee success. There's a possibility we'll achieve our sub-60 adjusted tangible efficiency ratio objective in 2018. It will be close. And if we don't, we'll achieve it in 2019 and we'll continue to have efficiency opportunities beyond that. The pace of improvement will vary year to year, as we take advantage of opportunities to grow our client base, improve the client experience and harvest efficiency savings. In addition to efficiency progress, we're beginning to make steps toward achieving our steady state capital objectives. We began our 2018 capital plan in the third quarter and still have 1.5 billion shares - dollars of shares to purchase over the coming three quarters. Our capital ratios declined by 15 basis points this quarter, putting us on a path towards achieving our 8% to 9% CET1 target. This trajectory when combined with positive mix shift in our lending portfolio and future efficiency improvement will continue to enhance the overall ROE profile of the company. This performance is positive and it cannot be achieved without our purpose of lighting the way of the financial wellbeing. Our company has again been tested with two devastating hurricanes, impacting our footprint in the past month and it never ceases to amaze me how much our teammates will do for our clients and for other teammates in the most challenging of circumstances. It is in these times that we're acutely aware of our obligation and commitment to enable financial confidence for our clients. We had few mobile ATMs, which we deployed in our disaster recovery truck in some of the most heavily impacted areas within the Panhandle two days after Hurricane Michael made landfall and we were one of the first banks to reopen in Wilmington after Hurricane Florence came through. Our teammates put their own needs aside and I'm incredibly grateful for their commitment to serving our clients. They do this because they believe in our work, they believe in our company and most importantly, they believe in our purpose. So team, thank you. In summary, we had a good quarter and our performance year-to-date has been very strong. As I said in the beginning, we have good momentum building in to the final quarter of the year and setting the stage for 2019. Thus, I remain highly optimistic in our ability to continue to deliver value for our clients, communities, teammates and our owners. So with that, Ankur, I'll turn it back over to you for Q&A.

Thanks, Bill. We're now ready to begin the Q&A portion of the call. As we do that, I'd like to ask participants to please limit yourself to one primary question and one follow-up, so that we can accommodate as many of you as possible today.

[Operator Instructions] Our first question comes from the line of John McDonald with Bernstein.

Bill, you showed good loan growth this quarter. It looks like 5% or so linked quarter annualized and came in a little bit better than maybe Allison had signaled at the Brokers conference and didn't slow from the second quarter. Kind of wondering if you could discuss what you're seeing in terms of current drivers and how you feel about pipelines and loan growth momentum heading into the fourth quarter.

I think we're benefiting from a number of things. One is the markets we serve and the businesses in which we specialize. Most importantly, the loan growth was really broad based. And C&I was, what I like, it was more advice driven, more proactive versus reactive. I think it reflected some of the investments we've made in talent, training, technology. And as I mentioned in my earlier comments, are really rigorous intensity around client planning and accountability. On the consumer side, I think we were capitalizing on investments we've made to meet evolving consumer preferences and we're just quite frankly delivering a really, really great experience. Also investments we've made with new partnerships and then on the mortgage side, we had some good seasonality increase there. So it was broad based. To your next question, I think the pipelines are really, really strong across all of those categories. So, I think the momentum is good, heading into the fourth quarter and headed into next year.

And just as a follow-up, one of the key drivers this quarter seem to be commercial real estate, where other banks are being cautious and some even smaller banks are starting to show a little bit of signs of stress. Recognizing that you're somewhat under indexed in CRE, can you just talk a little bit about how you're feeling of that segment and where you're seeing growth opportunities and that making sure that those are good loans you're making at this point in the cycle?

Yeah. I mean, you mentioned, we're a little under-indexed to CRE, but most of that growth has been related to strategies we've put in place now, a little over a year ago, related to two primary components. One is with our acquisition of Pillar, we have more opportunity to bridge some agency lending. So we have a really good partnership there to be able to provide lending in anticipation of fully underwritten agency deals. And then the second is we made a decision to do some longer term, medium to longer term financing on deals that we liked and rather than just doing the construction loan, it's doing a little more medium term financing. So it's not that we're sort of leaning against the wind, it's that we've got strategies in place that are just resulting in positive momentum.

Your next question comes from the line of Matt O'Connor with Deutsche Bank. Matt O'Connor: I was hoping to follow up on the NIM guidance. Obviously, NIM came in a little bit worse than you had expected this quarter and you did signal that a month ago. So I guess just trying to get your confidence in the fourth quarter and then guide in terms of being a little conservative and hopefully not getting caught off guard at all there.

Sure. Thanks, Matt. So, yes, I mean, relative to the revised guidance we provided in September, NIM did end up down 1 basis point for the quarter and really that was, as I noted, just a function of two things. One, we didn't get the run up and one month LIBOR over the course of the third quarter that we might have expected and two, have more positively - it was really driven by the strong loan growth we saw in the second quarter, which did create an increased reliance on some higher cost funding, that higher beta corporate deposits as well as some wholesale funding. As we think about fourth quarter and our guidance of 0 to 2 for this quarter, we really simply expect the full benefit of the September rate hike to actually materialize in the fourth quarter and so our guidance of 0 to 2 incorporates that. And, there's some expectation there as well, but betas do continue to increase modestly over the course of the quarter as well. Matt O'Connor: Okay. And then just separately following up on the comment about considering accelerating the share buybacks, maybe you can give more color on that in terms of what the magnitude might be and when you can get back to the market and buy back stock.

Sure. So, as we noted, our share buybacks for the year, we were approved for a $2 billion total share buyback. We executed on 500 million of that in the third quarter. What I will tell you in the fourth quarter is that 500 million will definitely be the floor for what we execute in this quarter. We feel really good about the prospects there.

Our next question comes from the line of Betsy Graseck with Morgan Stanley.

Wanted to dig in a little bit on the C&I loan growth, which was quite good, especially relative to competitors and understand how you're able to execute that in a market where the bid for bank loan is very high. Obviously, there's some competition from the CLO side, so maybe you could give us a sense as to how you either interplay with that asset class or are you underwriting things that's just not that attractive to them? And maybe you can also help understand on the IP side, why there was a little bit weaker loan syndication again, what we're hearing in the backdrop is that there's a huge bid for C&I loans. So wanted to get your thoughts and color on that?

Sure. Let me start with the non-bank side, which clearly we've seen some competition, but in fairness, most of that is sitting on the leverage lending side from a loan growth standpoint, but much smaller part of our portfolio. So, that impact on loan growth is lessened as it relates to specific non-bank competition. We see it on the CRE side as well, but there again, we've got strategies in place that I think reflect the quality of our relationships and investments we've made that sort of run counter to some of the non-bank competition. And then as it relates to the other balance of C&I growth, it's really just based on the investments we've made and specialization that we have, this really strong working relationship we have with our commercial team and our investment banking team such that we're really providing great advice. I think I mentioned in my comments that earlier, I mean, when I look at the loan activity, it just seems much more higher quality, it's much more proactive versus reactive, it's much more advice driven. And as I said fairly broad based and we also talked about the consumer side and the investments we've made there and the client experience that we're providing and the relevance of being where our clients want to make decisions, I think are things that are - continue to be strong as it relates to C&I. Then, you asked a little bit about the investment banking side. And yeah, the syndication side was a little lower this quarter. I think a lot of change in to the fourth quarter or [just looking] [ph] to the fourth quarter, a lot of that has been that category. So overall, for the year, I think we'll still have a strong year in syndicated finance, again same thing. We're at the front end of more of those deals, we're on the left side of more of those deals, so the quality of that fee generation to me is sort of exponentially higher than it was several years ago.

And Bill got it, but I would say nothing has changed in our underwriting standards on the C&I side. We remain very disciplined there. What you see really is just evidence of the strategy both from an industry focus, but also as we continue to execute against our strategy in commercial and really delivering it by some expertise down market.

Our next question comes from the line of Ken Usdin with Jefferies.

This is Amanda Larsen on for Ken. Allison, you mentioned that fees should bounce in 4Q in a few categories. Should we expect to see an offsetting increase in quarter-over-quarter expense to support that revenue [balance] [ph]?

Yes. I mean I think if you're saying, what should we expect for expenses in the fourth quarter, given fees were lighter in the third quarter, yes, as fees increase, in the fourth quarter, you would expect some element of expense growth to go hand in hand with that.

And then thinking about headcount and branch reductions from here, those figures are both down 6% year over year and 5% year over year respectively. Do you expect the pace of these declines to abate from here given already great progress in achieving the efficiencies?

Sure. As it relates to branch reduction, we've actually shrunk our branch count by about 25% already. As I think about where we could go from here, I'd say, we expect to continue to shrink our branch network somewhere in the range of 4% or so a year. That's really influenced by consumer behavior patterns and that will influence in any given year, how quickly we go and optimizing the density of our network and you would expect at least as it relates to branches some headcount changes there, but we don't focus a whole lot on headcount. We think more about our efficiency and how we continue to deliver continuous improvement on the efficiency ratio from their headcount nearly and input.

Our next question comes from the line of Geoffrey Elliott with Autonomous Research.

On the deposit side, there was a pretty significant drop off in period end non-interest bearing deposits. Can you maybe give us a bit of background on what was happening there?

Sure. I would caution you in looking at period end balances with deposits, I think average balances are going to be better indication of our deposit activity. I mean, specifically, what was going on in period end non-interest bearing deposits, as at the end of the second quarter, we had a short but large escrow deposit come in a few days before the end of the quarter that went out just a few days at the beginning - after the beginning of the quarter and that was expected. And so if you look at average balance at quarter to quarter, sequential quarter declines were 90 basis points of non-interest bearing deposits, which is really going to be I think a better indication of our performance. If you think about operating accounts, especially now and DDA, there is always going to be month end period end noise.

And then you've spoken a bit today and also at the conference in September about expecting to see some money move out of those non-interest bearing balances over time, because of higher rates and the increased opportunity cost to leaving cash earnings zero. Can you help frame that for us, if they're a portion of that deposit base that you kind of feel is sticky and will stay there regardless of the rate environment and a portion that you think is potentially going to move around, as rates keep on moving up.

Sure, it's hard to size exactly, but generally speaking, yes, as rates continue to move up, you would expect that non-interest bearing deposit levels do decline modestly over time. I mean, as we know, they're up quite a bit, given the protracted low rate environment, so you would expect some sort of normalized decline as those balances do look for better rate. I would say, one of our strategies is really to focus on our rates with our corporate liquidity product, which is a very attractive source of funding for us. We can actively manage that to help our clients meet their objectives and it's a better cost of funding for us relative to wholesale funding.

And just quickly there, you're talking about earnings credit rating or you're talking about the interest rate on that corporate liquidity offering?

I am sorry, say again, I couldn't hear you.

Are you talking about an earnings credit right there or are you talking about an interest rate, depending on accounts there?

I'm talking about interest rate and not product.

Our next question comes from the line of Mike Mayo with Wells Fargo Securities.

Bill, this question might fall in the category of no good deed goes unpunished, before you came, SunTrust had 25 years of negative operating leverage, since 2011, it's been positive, the efficiency ratio has gone from 72% to 60%, but what's left with the efficiency and why aren't your targets more ambitious? Now, I just know - mostly at your targets, as you said, you have a better franchise, peers are moving up and best in class is in the low-50s. So a concern is, are you relaxing your intensity a little bit in terms of the tone at the top of the firm because the rate of improvement is not as much and so how are you thinking about that.

Well, Mike, looking across the table at my leadership, team when you said relaxing and the intensity and there is a hell a lot of smiles on their faces, because they're not feeling any relaxation on the intensity. So, in the - no good deed goes unpunished. Appreciate the introduction. We've got the exact same focus on continuous improvement creating positive operating leverage and creating an improvement in the tangible efficiency ratio. That slope is going to just change by definition. The actual rate of - the actual efficiency ratio for any one back is also dependent upon a couple of things. One is their business mix and secondly, the intensity and the opportunity. We're trying to balance all that. I can assure you that '18 is going to be better than '17, and '19 is going to be better than '18. I mean, we're going to continue to be on that kind of pace. We are making sure though Mike, that we're also creating the right level of investment for the future of the company. I think this year is a pretty good example where you can see it probably more or verbally than you have in the past where you saw 150 basis point of efficiency improvement and then you saw outside processing and software costs go up 9%, just to sort of pick a line, which demonstrates the fact that you can invest and become more efficient at the same time, which is the commitment that we have. So, so some of it's going to be creating capacity. But all is going to be focused on making sure we're creating the long term best shareholder value we can at SunTrust

As far as a new efficiency target, if we were going to get one, would that be say in January and also you mentioned reduction in branches, 4% per year, any other kind of general areas where you might be able to reap additional efficiencies?

Yeah. I mean just to go with the latter part first. I mean, opportunities to achieve efficiency are everywhere. It's optimizing, staffing, that's right sizing, that's realizing and harvesting. We have a lot of investments that are on a variety of different J curves, from new markets to new private wealth teams to technology to CRM to all the things we've talked about, all of those things have harvest components to them. So we've made the investment and they have components in the past. In our private wealth side, we've made a lot of investments on the robotics side, the AI side. We'll get $20 million worth of improvement and that kind of investment and that kind of J curve, while improving client service, new origination platforms and mortgage and wholesale, I mean, there are lots of things. That's really not, as a matter of fact, I would probably discourage you from looking at the branch count as being sort of the only thing or the [indiscernible]. I mean, it's a lot of different things. As it relates to specific targets, the target for right now is that we're going to be back and we're going to balance that against the investments that we've got, the opportunities we have and at every point, Mike, we will continue to talk about it and hopefully continue to provide more clarity, but more importantly, provide more evidence of the fact that we're on this pace.

Our next question comes from the line of Gerard Cassidy with RBC. Mr. Cassidy, your line is open.

Tony, maybe, we can move to the next question.

Next question comes from the line of Erika Najarian with Bank of America.

My first question is on the strategy for the unfunding side. As loan growth could potentially continue to outpace deposit growth, I'm wondering what your decision tree is in terms of filling in with wholesale funding versus having a more aggressive campaign on the deposit side.

Sure. Thanks, Erika. So, yes, I mean loan growth could continue to outpace deposit growth, although, I would tell you we remain extremely focused on generating strong deposit growth. And notably, as you look at our CD growth, which has really been our targeted strategy for growth on the deposit side, about 40% of that growth this year is new money. So $2 billion of new money balances this year. So, we start there and really thinking about how do we continue to refine our deposit growth strategy, how do we use CDs to, which we like, because it actually gives us the opportunity to manage our asset sensitivity, but to deepen our growth with our existing client base and to attract new household deposits. After that, we look at our corporate funding and I mentioned our corporate liquidity products, which give us an opportunity to meet our wholesale clients, and actively use rate quarter-to-quarter, depending on the level of loan growth to help us create attractive sources of funding. And then we look to wholesale funding, we have access to a variety of sources of funding there, both secured and unsecured from the Federal Home Loan Bank to the market and we like our sources of funding on that side as well. So we feel like we have broad access and a number of diversified sources of funding, but we're going to start with really meeting our clients' needs, through both our consumer and wholesale funding strategies.

Thank you. And as a follow up to that, if banks that are SunTrust size, get relief on the LCR, what kind of flexibility do you have on the balance sheet to be able to self-fund future loan growth?

Incrementally. Yeah, it'd be hard to size that incrementally. I wouldn't say it's a tremendous difference.

Our next question comes from the line of Gerard Cassidy. Please go ahead with RBC.

Can you share with us, you just talked about the expectation that you're going to see the non-interest bearing deposit accounts draw down as rates go higher as well everybody in the industry. When you go back to the last tightening cycle from 94, I'm sorry '04 to '06, which is about 400 basis points, SunTrust non-interest bearing deposits, the total deposits declined about from 26% to 18%. Do you see a structural difference today where that decline may not be as material this time around for you if rates go up another couple of hundred basis points over the next 18 months.

I think that is a question certainly for us and a broader question for the industry that we're all evaluating. I mean, the one structural difference I would certainly point to is the fact that our relationships are much broader now with our clients than just rate. We offer our deposit clients so much more than rate paid. We offered them on line and mobile banking, a number of ways to interact with us through multiple channels, the benefit of the advice and solutions that they get, both through our online channels, but also in person. And so I do think structurally that we'll have some differences on how non-interest bearing deposits play out over this rate cycle, relative to others.

Yeah. The one thing I would add to that is just the commitment we made to be a more diversified franchise that holds true on the asset side, but also on the liability side. So, we're much more diversified by client type, by geography and then as Allison said, much more deeply penetrated. So I think this cycle, I don't know that the last cycle will be an exact predictor for this one.

And then just changing tacks here, on technology, you guys obviously have done a very good job in implementing your digital strategy and driving down your efficiency ratio or helping drive down the efficiency ratio. Can you share with us, what kind of penetration you're seeing in your consumer base for the number of customers that are using the digital channel, how many customers are using your mobile offerings and then finally just the total technology spend, what you guys are thinking about in that area?

Yeah. We've had strong mobile adoption. We're hovering right around 50% and most importantly, it really picked up every quarter. So, every quarter, we continue to see an improvement in mobile adoption, which applies to voting with their usage of our products and capabilities in addition to how they rate what we do, both from our clients and both from some of the external rating categories. So I think we're pleased with the level of mobile adoption. If you go down any category from sign-ons to mobile deposits, the online sign-ons, all of those are increasing at an increasing rate, which we view as positive. We're careful about sort of saying the number as it relates to total technology spend as everybody thinks about that differently and they look at capitalization rates and amortization rates and all those things differently. Just to say though that our overall investment in technology continues to grow and we sort of demonstrate some evidence of that. And all that is part of the efficiency initiative as to create capacity to continue to make relevant investments in technology that we think have long term benefits.

Our next question comes from the line of Steve Moss with B. Riley FBR.

Just want to ask about the credit cycle here, wondering if you are seeing any lending practices that cause concern or cause you to think that we are late in the credit cycle here.

Sure. This is Allison. I'd say lending practices that cause concern. First, as we mentioned non-bank competition, we do see very aggressive lending there as it relates to both structure term and pricing. I don't know that it causes us concern in our own portfolio, and let me say, more definitively, it doesn't cause us concern in our own portfolio because we deliberately pass on those and we haven't changed our own underwriting standards. As we look at our own portfolios and scour them, which we're doing constantly and you would expect us to do to look for any flashing yellow light of any concern, again, this quarter kind of consistent with the last few quarters, we really just don't see anything of particular concern. We watch it very closely. We're stressing at underwriting all of our portfolios for an increasing rate environment, but we do that on both the consumer side and the corporate side. As we think about the pressure of a rising rate environment and any stress that could have put on our clients, so we underwrite it at that level. We've kept a close eye on retail. That has not been an area of concern, although there was some noise there and we continue to keep a close eye on it as that is an area that is subject to disintermediation. And then, I'd say on the leverage lending side, I mean, there's obviously been a lot written around those portfolios and that is a - it's been a consistent portion of our balance sheet overall. It's really well diversified across sectors and that's the own area we keep a close eye on, although, we haven't seen any signs of stress yet.

Yeah. The one thing I would add, I'm not sure if it's necessarily a reflection of end of cycle as much as it's a reflection of how much liquidity exists in the system. So, there is a lot of money that's available to, if you pick the category, the non-bank lenders. If we look at sort of our own pipelines and near and medium term opportunities, we still see a lot of opportunities. So, we still see a good amount of runway. Again, I think, it's primarily a reflection of just how much money is available to chase that yield.

And then just on loan repricing here, I hear you on LIBOR increase in a slower pace, but the increase in C&I loan yields was perhaps a lighthouse, thinking - wondering if you're seeing more of a move to fixed rate lending or if you're starting to hedge?

No. I don't - I wouldn't say we're seeing more of a move. It's a fixed rate landing and in terms of hedging our own book, we really use our swap book to manage our interest rate sensitive overall and I think I'd say our views there are pretty consistent with what really have been. But if you're asking sort of broadly, are we seeing any sort of shift in the market right now, my answer to that would be no.

Our next question comes from the line of Marty Mosby with Vining Sparks.

I wanted to ask, going to this another efficiency initiative, I'm sure you're terminating that pension plan in that $60 million of, I get this right, it was already in your AOCI. So it didn't really affect your equity or your tangible book value, but I guess it will be recognized, I guess, would that be the fourth quarter and what are the expenses related to that each year. So you're going to pick up an efficiency again once that's done. So I just was trying to catch that a little bit.

Sure. Thanks, Marty. So, yes, you're right. The unrealized loss associated with our pension plan in AOCI today. So effectively, what the accounting requirement causes to do is flush that cost as a charge through the P&L in the fourth quarter. And as I said, that would be $60 million to $65 million in this quarter. As it relates to ongoing efficiency improvement there, it is de minimus and it was a relatively small plan. So, I wouldn't point to anything that's going to flow through on an annual basis from here.

And then the issuance of long term debt, it looks like there was about $1.5 billion and it really didn't move the needle on the, I was trying to look at the period and average and it looked like average went up, so it was reflected in the average, but the yield still remained around 2.92%. So is that prefunding some of the loan growth you expect to see, because when you put longer term funding on, that helps the LCR? So that gives you the ability or capacity to put loans against it. So I just didn't know if that was part of what was in the margin this quarter as well as prefunding some of the loan growth next year.

No. It really wasn't [indiscernible] loan to deposit ratio and the movement there quarter over quarter, I mean that was just really, as a part of our normalized funding plan for the quarter and wasn't necessarily - certainly wasn't any prefunding, it was just there to provide funding necessary inside of the quarter.

And would there be any incremental drag from that because it was issued in this particular quarter. So at least, there was part of the impact on the margin came from putting that extra amount of funding in at that higher rate?

Not really. I mean, there wasn't enough time for it to actually have that much of an impact on the quarter and as you think about our guidance for this quarter of 0 to 2, the wholesale funding that was done previously and that we would anticipate going forward is in that 0 to 2 guidance.

And our final question will come from Saul Martinez with UBS.

I guess I have a sort of a broader question. The investment narrative for SunTrust is that you're a leading player in a lot of growth markets, that your forward thinking of technology, of management team that's executed very effectively, but loan and revenue growth haven't necessarily been outsized more recently. And look, I get market conditions influence that, there are idiosyncrasies in any given quarter and you probably should grow frankly in some market environments. But if I take a step back and look beyond sort of a quarter to quarter, even the year trajectory, where should we see some of these positive elements or are some of the dynamics start to show up in your growth numbers and to deliver outside growth, where should we see that? What loan categories, what fee categories, how do we think about how it actually drives better than peer group loan growth or revenue growth?

Thanks, Saul. As you know, we don't typically guide or manage the loan growth. That's an outcome of the investments and the strategies that we have underway. Some of the exceptions to that are things like LightStream where we're leaning in heavily and see opportunities for growth. I think if you look back, just pick a couple of categories, so if you look back at investment banking and you look back at sort of a 10 plus percent CAGR for now well over ten years, I mean I think that some of the reflective things of prowess and opportunities that exist within our markets, but more importantly within the investments we've made and the specialties that we have. So, I think that will be one of the categories that we'll see - we'll also see categories in private wealth, which reflects the transfer and the opportunities and the wealth building that's taken place in our markets. I mentioned the consumer lending component. We're going to see some - we're going to cycle now with mortgage that we've got the refi side we now and we'll see a more normalized version of mortgage, which I think will reflect some markets that we live in, the affordability and capacity for new home construction and formation in our markets. Commercial real estate, in terms of the investments that we've made in agency product, investments in opportunities in our portfolio, the number of national and regional firms that are consolidating in the regions we have and then sort of core basic commercial banking, which we see good growth in and I think that probably is a strong reflection of the markets that we operate in and the ability to generate advice based, fee based business from that. So I think there are a good number of things and many of those have momentum and I think reflect markets and investments that we've made.

Okay. Thanks, Saul. And this concludes our call. Thanks everyone for joining us today. If you have any further questions, please feel free to contact the IR department.

Ladies and gentlemen, that does conclude our conference for today. You may now disconnect.